It’s foolish for society to cling to its old ideas in new times, just as it’s foolish for a grown man to try to squeeze into the coat that fit him in his youth.—Thomas Jefferson

             The American Revolution was more than a mere fight over who should rule this country.  It was a rejection of the principal that people should be governed based on the naked preferences of a monarch; that our rights and actions should be permitted only by leave of the ruler.  In its place, our forefathers established a “republic of reason,” true to the Lockean philosophy that it is best in most matters for free men to “wage their own law” with respect to their activities.  Our culture came to place a high value on individualism, and on promoting freedom of contract and choice.  In the corporate context, this created a political environment that sought to enable and enhance what a corporation’s organizers desired to do, leaving to market forces the decision as to which entities should thrive and which entities, fail.  In short, everything would be permitted unless it was specifically prohibited.


            There have been few, major modifications to this weltanschauung since that fateful break in 1776.  Perhaps the most famous such change was the New Deal Supreme Court’s decision in the 1937 West Coast Hotel case.  That case overruled the fourteen year old precedent of the Lockner Court’s holding that minimum wage legislation for women and children was an unconstitutional violation of the right of contract, as it imposed an “above market” premium to be paid to labor.  Implicit in this reversal was a recognition that, in modern times, the “status quo” had effectively eliminated an individual’s ability to bargain equally with big business.


            However little change has been made to our corporate governance structure and culture since the first corporation, the East India Company, was formed on December 31, 1600.  The primary objective of a corporation, and hence of its directors, has been and still is only to maximize profits and shareholder value for shareholders.  (ALI Principles of Corporate Governance)  In contrast, our European counterparts follow a “stakeholder” model whereby corporations must recognize their interdependence with suppliers, labour, banks, government and all others who have a “stake” in the enterprise.  Under this European model, the board of directors is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders.  (Organization for Economic Co-operation and Development Principles of Corporate Governance) 


            As recently as this year, our multinational corporations continued to bristle at the idea of any government intervention into their rights of “free enterprise” and self governance.  Laws like the Sarbanes-Oxley Act were viewed as expensive acts of officious intermeddling in what were essentially private affairs.  It was asserted to be a private matter of contract—a view that was subsequently upheld by our courts—that the New York Stock Exchange could pay Dick Grasso $190 million for acting as chairman of an eleemosynary organization.  It was asserted to be a private matter of contract that the giants of the lending industry could charge consumers twenty to forty percent interest on credit card debt.  And yet no one has deemed it proper to ask whether the rules and principles that worked so well in those quaint and slower-paced days of the seventeenth, eighteenth and nineteenth centuries fit the demands of the twenty-first century:  a century where the 100 largest of our behemoth multi-national corporations have revenues that, if called “gross domestic product,” would have each of them ranking in size between the thirty-third and the ninety-sixth largest countries in the world.


            Then, and of a sudden, the market forces of “creative destruction” that the captains of industry lauded as vouchsafing for the integrity of the capitalist system took their hold, and these giants began to stumble and fall.  We began to hear cries of “too big to fail” and how the survival of these institutions was so intertwined with the very stability and financial health of our society, that unlike consumers or all other small to medium enterprises, it was a matter of governmental priority that they be bailed out, and that their losses be borne by the public.  AIG, Citigroup, Goldman Sachs Group, JPMorgan Chase & Co., Wells Fargo, GE Capital, and others, and now General Motors, Chrysler and Ford lined up at the public trough for monetary sustenance. 


            I do not argue that such assistance is not now prudent.  Clearly, the essential, intrinsic part of our basic economic structure that these institutions play requires their being healed.  But what I do ask, is that if they are so affected with a public interest, was that not also the case before they fell into trouble.  And if you answer that question in the affirmative, does that not mandate that such institutions should be required to serve all stakeholders, rather that merely those who from time to time buy their shares?

            The importance of a properly functioning governance system, both for bodies politic and corporate, cannot be overstated.  As noted professor Mauro Guillén of the Wharton School has pointed out, “a poorly conceived [governance] system can wreak havoc on the economy by misallocating resources or failing to check opportunistic behaviors.”  This current crisis was the result of both of those errors.

            In 1624, John Donne presented us with the truth that a society is at its best and its worst, an integrated whole.  In a certain sense, we are all partners in this American experiment; all men and businesses and corporations affect, benefit or diminish each other because they all are “involved in mankind.”  Is this not thus the time to cast off our blinders of greed and revisit our corporate governance system to recognize the interdependence that businesses have with all of us, and to constrain their decision-making accordingly?  When the giants began to die, “the bell tolled for us,” and we answered its call.  Should they not similarly be required to care for society’s well being in times of plenty?

© Richard L Wise and 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and with appropriate and specific direction to the original content.



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